Breaking Apart a Giant.

by David Klemke on September 16, 2009

When the National Broadband Network was announced it was fairly obvious it was going to be a big stab to Telstra. Their monopoly on Australia’s copper line infrastructure was beneficial in the early years when it was wholly government owned. However in true Liberal style John Howard thought it best to privatise the company, and that’s when things started turning bad. There’s only one thing worse than a monopoly controlled by a government, and that’s a monopoly controlled by shareholders.

It seems however that in order to circumvent the mistakes of the past the Labor government (I highly doubt Conroy was the driving force behind this, but I’m willing to be proved otherwise) is in essence bringing Telstra back under government control, albeit in a rather weird fashion:

Communications minister Stephen Conroy has put the Government on a collision course with Telstra, warning the telco giant to split its wholesale and retail arms, or face business restrictions.

The major reforms to the telco giant’s structure and operation were announced today as the Government geared up to roll out its $43 billion National Broadband Network and move Telstra towards becoming part of it.

The Government is moving to restructure the sector to pave the way for the rollout of the network, which it plans to build in the next eight years.

Now don’t get me wrong I like this idea. Telstra has been using its monopoly on the copper lines as a bargaining tool for many years and it’s done nothing to improve the level of service that Australian’s recieve. In fact around 8 years ago they were caught selling broadband plans cheaper than what they sold wholesale to their competitor ISPs (I can’t find a direct article, but here’s the results). Putting their retail section at arms length from their wholesale division is a good move that will hopefully keep them a little more honest, but I still have this weird feeling about how they’re going about it.

Really the issue stems from the previous government selling off our assets in order to fund their surplus (although the historical position on the matter seems to be that the government couldn’t keep pace with technology, go figure). Bar actually buying Telstra back from it’s shareholders there’s not a lot the government can do apart from legislating against them. Although with the government hammering them with legislation that will, let’s be honest here, damage Telstra’s business they could get themselves a bargain with the share price dropping 6% on this announcement. I guess it’s probably the best solution we can hope for as the government’s hands are tied from any other course of action.

On the surface this would appear to be a hastening of Telstra’s defeat at the hands of the National Broadband Network but in reality it’s the opposite. The initial plans announced by the Labor government made no mention of Telstra’s involvement at all and in fact, their involvement in a previous Fibre-to-the-Node (FTTN) request for tender was seen as joke rather than an actual submission. It seems however that this separation might form part of some deal that will get Telstra in on the ground level for the National Broadband Network, with the public announcement just the government making sure Telstra stays honest.

Overall this appears to be a benefit for Australian’s at large. It should mean that the Internet service we get is more uniform and at a lower cost than what we currently get. It will also stop Telstra from standing on top of its monopoly hill in order to keep themselves going, hopefully leading to some actual innovation by the company. It’s going to be a long process to get this whole thing worked out and I’m sure we’ll be hearing much more of this over the coming months as negotiations take place.

I’ll be watching.

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2 Comments

I reckon Conroy was probably the one to have pushed this, he may be a goomba when it comes to censorship, but he has been fighting Telstra on behalf of ISP’s for many many years in Senate committees and knows his stuff.

Telstra was kept together to heighten the overall share price, but its sell off makes sense. Keating wanted to sell it when in govt, but Labor after 1996 inexplicably went back on this tradition (and so made sell/dont sell the debate, rather than sell/ split then sell). There’s no reason the govt should be selling retail telecommunications services, but like the roads and rail, it needed to retain the physical infrastructure in public hands. A 6% drop is pretty tiny, (it was 14c when Sol wiped off $2.00, and it’s regained half that this morning on the ASX). So Howard seems to have over-estimated the lost income.

That said, one major reason I think the market is ok with it today, is that the big flaw in the govt’s NBN was the idea it would build a whole new network next to telsta’s. With telstra wholesale a different beast it could plausibly levy heavy regulation (ie no preferential treatment) and simply give the whole contract to Telstra Wholesale to upgrade its network. This would massively cut costs and give it a pre-existing structure and expertise to carry out the work. The other ISP’s would complain, but they will be in no worse a position than Telstra retail.

I find it easier believing that he’s a numpty, but that would just be my internal bias 😉

That was the essence of the problem wit the sale, they created a monopoly on what now constitutes public infrastructure. I agree with you that they should have split before selling, it would’ve made a lot more sense and possibly lead to a bit more innovation in Australia’s telelcommunications industry. Hindsight is 20/20 again in this case.

Co-operation with Telstra will make the whole NBN implementation cheaper although I’m still hesitant to give it to a private company. Sure we can regulate them heavily to make sure that they don’t behave in an anti-competetive way but wouldn’t it then be better off just being in the hands of the government? I guess the problem we come down to here is actual funds for the project, as at the moment they’re only footing about 10% of the predicted costs of the network with a look to sell it all off once it has its feet.

I agree on your final point though, finally something meaty from Rudd 🙂